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PROBLEM 6-37 (25 MINUTES)

1.

Variable maintenance cost per hour of service

$4,710 $2,990

525 310

= $8.00
Total maintenance cost at 310 hours of service........................................
Variable maintenance cost at 310 hours of service (310 hr. $8.00).......
Fixed maintenance cost per month............................................................

$2,990
2,480
$ 510

Cost formula:
Monthly maintenance cost = $510 + $8.00X, where X denotes hours of
maintenance service.
2.

The variable component of the maintenance cost is $8.00 per hour of


service.

3.

Cost prediction at 600 hours of activity:


Maintenance cost = $510 + ($8.00)(600) = $5,310

4.

Variable cost per hour [from requirement (2)]...........................................


Fixed cost per hour at 610 hours of activity ($510/610)............................
*Rounded.
The fixed cost per hour is a misleading amount, because it will change
as the number of hours changes. For example, at 500 hours of
maintenance service, the fixed cost per hour is $1.02 ($510/500 hours).

$8.00
$ .84*

PROBLEM 6-43 (35 MINUTES)


1.

The regression equation's intercept on the vertical axis is $190. It represents the
portion of indirect material cost that does not vary with machine hours when
operating within the relevant range. The slope of the regression line is $5 per machine
hour. For every machine hour, $5 of indirect material costs are expected to be
incurred.

2.

Estimated cost of indirect material at 850 machine hours of activity:


S = $190 + ($5 850)
= $4,440

3.

Several questions should be asked:


(a)

Do the observations contain any outliers, or are they all representative of normal
operations?

(b)

Are there any mismatched time periods in the data? Are all of the indirect
material cost observations matched properly with the machine hour
observations?

(c)

Are there any allocated costs included in the indirect material cost data?

(d)

Are the cost data affected by inflation?

4.
Beginning inventory.............................................................
+ Purchases..........................................................................
Ending inventory...............................................................
Indirect material used..........................................................
5.

April
$1,300
5,900
(1,350)
$5,850

High-low method:
Variable cost per machine hour
=

difference in cost levels


difference in activity levels

$5,850 $4,200 $1,650

$5.50 per machine hour


1,000 700
300

August
$1,000
6,200
(3,000)
$4,200

PROBLEM 6-43 (CONTINUED)


Fixed cost per month:
Total cost at 1,000 hours...............................................................................
Variable cost at 1,000 hours
($5.50 1,000).........................................................................................
Fixed cost.......................................................................................................

$5,850
5,500
$ 350

Equation form:
Indirect material cost = $350 + ($5.50 machine hours)
6.

The regression estimate should be recommended because it uses all of the data, not
just two pairs of observations when developing the cost equation.

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